Companies’ Social Impact Increasingly Scrutinized by Investors.
Greg Wait of Falcons Rock gave his insight into the recent rise and benefits of socially responsible investing (SRI) for this BizTimes article from February 5th. Read February article.

History Has Steered Folks to Environmental, Social and Governance Investing.
In this Milwaukee Journal Sentinel article from July 15th, Tom Saler explores socially responsible investing (SRI) and breaks down some recent high-profile examples. Read July article.

New Firm Targets Socially Responsible Investors.
In this article from January 9th, Milwaukee Journal Sentinel reporter Kathleen Gallagher explores Greg Wait's launch of a new company that combines socially responsible investing and online investment advice. Read January article.

Investment Trends, with insights by Greg Wait. In the Milwaukee Journal Sentinel's October 17th article, Kathleen Gallagher and Greg Wait discuss the recent rise of environmental, social and governance, or ESG investing. Greg provides insight into how reduced risk and improved returns are causing money managers to include ESG investing in their portfolios. Read October article.

Responsible Investing: Creating Financial and Non-Financial Value by Greg Wait. Do investors sacrifice returns in pursuit of their goal of advocating for a better world in which to live?Learn more.

Ten-Year History of Investment Manager Performance by Greg Wait. As part of our process, we have conducted investment manager research and due diligence resulting in manager or fund recommendations to our clients. Here are our findings.

The month of September, 2013 marked the 10-year anniversary of Falcons Rock serving our clients and building relationships. We are grateful for all the years of friendship, loyalty, and support, and look forward to our next decade!

Investment Trends, with insights by Greg Wait. In the Milwaukee Journal Sentinel's July 20th article, Kathleen Gallagher and Greg Wait discuss the rising U.S. Treasury rates and using duration as a measure of risk. Greg's comments relate to whether we'll be "looking back on this short-term increase in yields as the warning shot for the much-anticipated longer-term rise in interest rates."Read July article.

Additional articles in the Milwaukee Journal Sentinel featuring Falcons Rock:
One is a fascinating story about a Mequon drug development company, which has a few of our clients as private investors. Read article about our angel investors

Another features us in the Market Trends column: Strategy targets uncertain economy - and how Falcons Rock confronts specter of slow growth.Read how we help clients get ready

There is a great deal of debate in the investment industry regarding active vs. passive (indexing) investment management. We researched this topic and the results might be surprising to you. Please see our research paper on this subject...more

We have experienced interesting situations with
our clients. To update you on our firm’s activities, check out examples
of recent work we have done for our clients...more

Lions, Tigers and Bears…Oh, My!

2015 Quarter 2 Market Review

In Greek mythology, the Nemean Lion was a vicious monster that could not be killed with human weapons because its fur was impervious to attack…until it was strangled by Hercules in his first of twelve labours. In the Chinese Zodiac Calendar, the Tiger occupies the third position and symbolizes bravery, competitiveness and unpredictability. With the run-up in US and Chinese stocks over the past five years, “value” investors are forecasting the next Bear market.

The Greek government and citizens are playing a dangerous game with the European Union, betting that their leaders would rather restructure their debt than allow a “Grexit” from the Eurozone. The European Central Bank (ECB) countered by freezing liquidity assistance. Greek banks are essentially shut down and citizens are currently limited to withdrawals of only 60 euros per day. It is estimated that Greece will be depleted of all its euros within about a week, which could effectively force it to print new currency (return of the drachma?) to sustain its own economy. Although the Greek citizens voted to not accept the austerity measures required by the EU, new negotiations began last week and Europe seems to be tightening its grip even further…perhaps the Greek citizens thought they were strong like the Nemean Lion, but their Hercules may be the leaders of the Eurozone. The fear among global investors is the contagion risk associated with a Grexit. This is a very fluid situation, and certainly a Greek default would represent a tremendous failure of the European Union concept, but there does not appear to be significant short-term market risk for a few reasons:

Almost no debt is held by the European banks anymore…this debt is mostly held by the International Monetary Fund and the ECB.

Greek debt represents only 0.4% of U.S. banks’ total consolidated foreign claims.

The unpredictable Chinese Zodiac Tiger has been roaring lately, as a collapse of Chinese stocks has frightened shareholders, many of whom are ordinary Chinese citizens who have an appetite for risky investments. The Shanghai Composite Index is down nearly one-third from its peak on June 12, 2015. The Chinese government has intervened in its stock markets nearly every day in an attempt to stop the slide, but they appear to have lost control. Of course, many global investors are uncomfortable with the Chinese stock market precisely due to the reality of government intervention. The declining stock prices may be representative of a slowing Chinese economy, or simply that its market had become so overheated over the past year as the government encouraged stock investment by its citizens. By June 12th, the Shanghai Composite had risen over 60% since the end of 2014! Chinese stocks had grown to represent over 20% of the MSCI Emerging Markets stock index. Most professional investors are behaving more like the Zodiac Rooster…observant, analytical and resourceful…waiting for the selloff to end so as to find new opportunities in the Chinese market.

In the U.S., value investors (those who seek to purchase stocks at prices less than their perceived intrinsic value) have become market bears, as they are being challenged to find stocks that meet their strict criteria. The price/earnings ratio of the broad S&P 500 Index is now at a level that is higher than its long-term average, but by a narrow margin. Many of these same value investors have underperformed their benchmarks over the past five years, as their “high quality” stock bias has been out of favor in the market…lower quality, debt-laden companies have performed very well during the low interest rate environment since the last recession. The very recent events in Greece and China are causing these investors more anxiety.

All that said, most U.S. economic indicators are still positive and the Federal Reserve is still stimulative (as is the ECB). Short-term market volatility generally is beneficial to active managers and alternative strategies, as they are able take advantage of new dislocations in the prices of securities. Perhaps, like Dorothy and her friends in the Wizard of Oz, spooked investors will stay the course and find their way back home.

Second Quarter 2015 Review

The S&P 500 Index barely managed to generate a positive return in Q2 2015, after an unusually volatile quarter (at least relative to recent years). During the first half of 2015, this index was down more than -2.5% five times, but also hit multiple record highs. The best performing sectors in the S&P 500 Index during Q2 included Health Care (+2.8%), Consumer Discretionary (+1.9%) and Financials (+1.7%). The worst performing sectors during the quarter were Utilities (-5.8%), Energy (-1.9%) and Consumer Staples (-1.7%). Small and mid-cap stocks saw mixed results during the quarter.

During the second quarter, the US Dollar weakened against most foreign currencies, reversing a recent trend. Non-US stocks, as represented by the MSCI ACWI Index, produced mixed results (+0.5% in US Dollars, -0.4% in local currencies). In their local currencies, the best performing countries included China (+6.2%), Japan (+5.2%), Russia (+4.1%), and Brazil (+4.0%). Selected countries with the worst returns during the quarter included Germany (-8.5%), the UK (-2.8%), France (-2.7%), and India (-1.9%).

There were few places to make money in the bond markets during the quarter, as investors began to fear that the Fed may be closer to raising interest rates. Overall, most balanced portfolios posted small losses during the quarter. Alternative strategy results were mixed but the commodities markets rebounded during the quarter.

Here are the returns for select market indices for Q2 (as stated in U.S. dollars):

This and That

Many economists believe that the U.S. is in the late innings of the current expansion cycle, and at least 80% of the path back to full employment (12.4 million jobs gained since the recession).

The U.S. household debt service ratio (debt payments as % of disposable personal income) is at a near record low of 9.9%.

U.S. consumer confidence, business confidence, consumer spending and home sale prices are at or nearly back to their prior peaks.

Based on the latest available survey (2013), the average annual earnings for a full-time worker aged 18 or older in the U.S. are $32,881 for a high school graduate, $59,661 for those with a bachelor’s degree, and $82,613 for people holding an advanced degree.

In 1989, the U.S. represented nearly 61% of the global bond market. Today, the global bond market consists of 48% developed non-U.S., 37% U.S., and 15% emerging markets debt. The U.S. represents 52% of the global stock market.

Since 2007, retail investors have collectively withdrawn $707 billion out of U.S. equity funds. Institutional investors have collectively deposited $654 billion into U.S. equity funds.

From Mark Twain: “It’s not what you don’t know that gets you in trouble, but what you know for certain that just ain’t true.”

Global market uncertainty is a continual reality for all investors. Instability and market corrections cause fear but also create opportunity. Nobody can predict when disruptive economic, market or geopolitical events will occur in the future, but prudent investors develop diversified strategies that give them the best chance of meeting long-term objectives and adhere to these strategies until their objectives change…we all need to “follow the yellow brick road!”